The Rupp Report: Cotton Prices Not Forgotten

Jürg Rupp, Executive Editor

For the last several weeks, ITMA 2011 in Barcelona, Spain, was the focus of the Rupp Report.
However, some readers have been sending in emails to ask for the latest news on the cotton front.
And what can be better than to be approached by the valued readers and serve their needs? Here is
the latest news:

In late June, NY July futures rallied 1,859 points to 164.55 cents, while December closed 78
points lower at 119.40 cents. “It was a bizarre week in the futures market, because July and
December seemed to move contrary to what their respective fundamental situation was suggesting,”
noted Plexus Cotton Ltd. in its weekly Market Report.

In early July, futures and demand came under pressure: NY December futures dropped 507
points to 113.52 cents and there was concern the drop in demand might more than offset U.S. crop
reductions. “Mill demand continues and to be only of sporadic nature and certainly not sufficient
to absorb all the foreign stocks that merchants and growers would like to get rid of,” Plexus
reported, recognizing a “striking difference” between the balance sheets of the United States and
the rest of the world.

Plenty Of Cotton Available The July 7 report stated that “there is still plenty of cotton available in the rest of the
world, starting with the vast unsold supply in Uzbekistan and Turkmenistan, followed by positions
in India, Brazil, Australia, Argentina and various African countries, which is where the current
price pressure is coming from.” The prices remained volatile for weeks.

And, in early August: “NY futures were able to extend their recent gains, with December
advancing another 235 points to close at 104.92 cents.

“The problem … with this trade net short in futures is that it is mainly ‘hedging’ long
positions in foreign growths, such as Brazilian, Australian, Indian and African origins. [The US
has] 7.4 million statistical bales in outstanding export commitments plus whatever shippers already
sold to domestic mills.”

In the meantime, the International Cotton Advisory Committee (ICAC) reported: “The
season-average Cotlook A Index reached a record of $1.64 per pound in 2010/11, twice as high as the
2009/10 average. However, the season-average A Index will decline in 2011/12, as an increase in
production will replenish stocks.”

According to ICAC, “world cotton production is expected to rise by 8% to 26.9 million tons
in 2011/12, driven by the high cotton prices received by farmers in 2010/11. Production will rise
in most large producing countries, with the exception of the United States. Production could reach
records in India and Australia. Despite a significant increase in U.S. planted area, severe drought
conditions in Texas will not only increase abandonment but also limit yields. U.S. cotton
production is forecast at 3.5 million tons in 2011/12, down 12% from the previous season.

“As a result of the surplus of 1.8 million tons expected in 2011/12, world ending stocks
could rebound by 20% to 10.9 million tons. The global stocks-to-use ratio could recover from 37% in
2010/11 to 43% in 2011/12.”

A Retreat, However … In late August, Plexus reported: “NY futures retreated … as December gave back 396 points to
close at 102.99 cents. … Although the market managed to rally all the way up to 109.00 cents,
taking out the 108.62 cents resistance level and filling a chart gap at 108.88 cents in the
process, there wasn’t enough momentum to sustain the advance and prices have since fallen by over
500 points.

“Merchants have apparently been busy trying to reduce their US exposure by switching to
other growths, since ‘optional origin’ sales increased by 607,700 running bales, with 546,900 bales
involving commitments to China. … After this latest round of cancellations, or rather switches to ‘
optional origins,’ total outstanding commitments now amount to 6.5 million statistical bales of US
cotton, plus 0.7 million bales in the ‘optional origin’ category.”

Going Up Again On September 8: “NY futures have moved sharply higher, with December gaining no less than
1064 points during that period, closing today at 113.63 cents. … The market had closed the previous
12 sessions in a very narrow band of just 335 points, between 102.99 cents and 106.34 cents, with
open interest showing hardly any change at all. But just when everyone was getting used to a dull
sideways trend, the market found a way to escape the boredom. Although some point to the floods in
Pakistan and the rains in India as the cause for this rally, we believe that it was a wide variety
of factors, both fundamental and technical, that led to this bullish move.

“Enquiries are definitely picking up, as mills are in the process of replenishing their
inventories. Yarn prices have started to rebound as well and we are seeing some encouraging signs
on the retail front. … The fact that the Chinese Reserve is, as of September 8, actively procuring
cotton in an effort to restock its depleted inventory, is another important element of support for
the market. The first procurement auction for 24,300 tons failed to attract any sellers, which is
to be seen as a bullish sign by the market. The buying program by the Reserve is intended to run
through March 31, 2012, and should provide decent support underneath the market.”

The week before the opening of ITMA in Barcelona: “NY futures traded lower this week, with
December dropping 201 points to close 111.62 cents. Although the market did not find enough
follow-through buying to keep last week’s upside momentum going, it has so far managed to hold and
consolidate recent gains. Volume tapered off considerably after 30,000 lots had changed hands last
Thursday and even though overall open interest increased by 1813 contracts since then, December saw
its open interest drop by 560 lots.

“However, conditions in the physical market have definitely improved in recent weeks, with
yarn values continuing to trend higher and mills apparently being able to work with replacement
values of around 120 cents landed Far East at the moment. Also, the floods in Pakistan’s Sindh
province have probably washed away some 1.5 million bales and impacted the quality of the cotton
that survived, while persistent rains in India’s Northern Zone has also adversely affected output
and quality, which is lending support to the market.”

Now, a few weeks later: “The US currently has export commitments of 8.0 million statistical
bales, of which only about 1.0 million bales have so far been exported. This means that there is
still a lot of cotton to come out of the US, sold or unsold. US merchants are currently trying to
figure out their quality position, because the US crop presents a very mixed bag of good, bad and
ugly cotton against commitments of mostly premium grades.”

The next page of the cotton story is yet to be written. The Rupp Report will keep you
up-to-date.